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Market Plus: May 14, 2010: Darin Newsom

posted on May 14, 2010

Market Plus: May 14, 2010: Darin Newsom Pearson: Welcome to the Friday, May 14, 2010 version of our market podcast here at our Market to Market Web site. Glad you've joined us. I'm Mark Pearson. With us this week, Darin Newsom, one of our regular market analysts. All right, Darin, you teased us at the end of the show about these commodity funds. These are big dollars that flow into Chicago, they have been told they needed to get out of corn and beans and they said, you're way overloaded there, you need to go do something else and so they have been kind of redeploying their assets. It's interesting where they redeployed them. Those markets have gone substantially higher.

Newsom: Yeah, earlier this year towards the end of 2009, early 2010 we saw a huge wave come into the livestock markets. These markets had been very quiet for quite some time. The volatility was low, prices were somewhat subdued compared to other commodity markets and this is exactly the situation that they're looking for when these reallocations occur. Maybe they want to pull out of these highly volatile markets that are trading near all-time highs and go into something that people haven't been watching all that closely and it seemed to draw money into live cattle, certainly into lean hogs as well and so we saw them skyrocket.

Newsom: Of course, they had the benefit of some bullish fundamentals that we hadn't seen in a few years, that certainly helped. But as we get here into May, heading into almost the mid-year we're starting to see some money starting to flow back and forth into some other markets as well, they're getting a bit nervous about these corn and soybean situations, certainly the Dow Jones has them concerned and so if nothing else they're starting to square up some of their positions which is bringing some buying into some markets, again, that haven't been paid a lot of attention to such as natural gas and wheat.

Newsom: So, I think over the next month to six weeks, maybe two months I think we're certainly going to see some interesting moves being made by these funds.

Pearson: I don't like to use a medical, clinical term like depressed but both wheat and natural gas fit that category. So, you think either they're going to jump in there and cover their shorts or are they going to come in and just start buying those commodities because they think they're due for a move?

Newsom: I think we could see, I think initially it's going to be more of the covering of the short positions. They have built such a large net short position in both those markets.

Pearson: I assume very profitably.

Newsom: Profitably, yeah, particularly if we look at the natural gas the way it's just been beaten down basically since 2005 when this whole wave of commodity buying began. So, I certainly think that's what is going to start the interest. If at that same time there's other groups that are saying this market still looks like it's good value, low volatility I think that's going to pull some additional money in. So, we could see both types of buying coming in but I think initially it's going to be that short covering that sets the tone.

Pearson: When the CFTC said you've got to move these dollars around, you're so overloaded you're too much a part of this market and primarily the corn and soybean pits aren't you kind of surprised that we've seen really those markets hold up? We talk about the money going into livestock which has had this huge rebound. But really the redeployment of those assets we're still looking at decent corn prices, huge crop last year, huge crop going forward USDA is saying, certainly got the crop in, in a timely fashion so far and yet we're still in, again, not great shape, decent shape.

Newsom: It's this demand market that has developed corn basically since the fall of 2006. We could probably go back a little earlier. But with this explosion of the ethanol industry moving us into a demand driven market we have a different price range that we can expect and we're slowly working back down into that lower end of that. We're hanging around these mid 3's and so on which used to be high but not they're down towards the lower end.

Newsom: So, I think that's what we can attribute the stability of this market to is that we have this demand out there. Now, if it starts to falter then I think we're going to really test the low end of these sides. But as we see in the USDA and WASDE reports demand is supposed to stay very strong over the next marketing year as well. So, I think it's going to keep that undercurrent of support in the corn market.

Pearson: Tell our listeners, viewers what they should be watching for. Is it the CFTC commitment of traders reports or how do I know what these funds are doing?

Newsom: Easiest way is the way I like to look at these markets. Number one, we could look at the CFTC reports but those are outdated by the time they are released, it gives us a good guide. The easiest way is to look at the price trends in these markets either on a daily, weekly, monthly whatever you want to look at. Daily and weekly charts are probably the most useful. If we start to see some large price swings moving one direction or the trends changing that gives us a good idea of what the money in the market is doing.

Newsom: If we want to get an idea of what the commercial traders are doing we look at the spreads, if they are weakening, strengthening and so on. If those two are moving together then you've got both sides of the markets acting at the same time. That is how we look at it and that's how I watch, kind of gauge what the funds are doing is simply by watching the price trends.

Pearson: The trend is your friend when it comes to this kind of trading.

Newsom: It can be or it can get pretty ugly very fast.

Pearson: That's right. All right, well the caveat is there. Darin Newsom, thank you so much, we appreciate your insights and analysis with us on Market to Market and here on Market Plus. For all of us on Market to Market, I'm Mark Pearson. Have a great weekend.

Tags: agriculture commodity prices markets news